NEB Chair Has Warning for the Industry
The chairman of Canada's National Energy Board, Ken Vollman, has
fired a shot across the bows of the international natural gas
community, urging it to do more than count the profits from today's
In an address to a capacity crowd at a Calgary conference
attended by delegates from 38 countries, Vollman urged the industry
to ask itself the same questions beginning to trouble consumers and
politicians --- and try coming up with answers for its own good. He
wondered aloud: Are current high prices just another spike? Have
markets climbed to new plateaus? Are supplies reliable? Are the
prices danger signs? Should actions be taken to make sure of
reliability, such as switching back to long term contracts?
Vollman raised the questions in an address to the 2000
International Pipeline Conference and Technology Exposition. The
NEB chairman urged the crowd to think about whether the industry is
rapidly entering an entirely new era requiring fresh adaptations to
a changed market environment.
Vollman urged the industry to ask itself if the time for relying
on markets dominated by short and spot sales to generate all the
answers is ending. "Energy prices have more than doubled in a
short period," and "price-cap proposals" are proliferating, the NEB
chairman pointed out. "It is becoming increasingly difficult in
this environment to arrive at negotiated solutions."
"It may take a few years to write a new heading" that defines
the changed era oil and gas now seem to be entering. He stressed
that the industry still has a chance to engineer favorable
characteristics for its next phase, as long as it can avoid
disorder that alarms the buying side of energy markets.
In an interview, Vollman said he and the NEB have not concluded
that current high prices are more than another brief event in the
"market-oriented" era's recurring spikes. But he said this peak has
been so dramatic that he has to send the industry a message.
"People are just assuming the environment they're operating in will
continue." The NEB chairman's message is simple and direct: "Think
Vollman predicted "the next year or two will determine what we
write into the box (describing the new historical era). How will we
have reliable supplies at acceptable prices? If there are
disruptions this winter, there is going to be increased pressure on
politicians to do something..... perhaps intervene." The
forthcoming heating seasons will be a test of free markets.
"Governments are committed to free trade and deregulation. That
will continue as long as it serves the public interest well."
The industry needs to think about whether using "market
instruments" such as longer contracts are needed to encourage
supply development as well as inject an element of stability into
periods of tightness. He said the industry's reliance on short-term
trading of natural gas is becoming an issue as efforts get under
way to tap new supply basins in Alaska and the Canadian Arctic.
"Can we bring these into being with short-term market instruments?"
Vollman's message, while delivered in politely reserved
language, was stern stuff for a Canadian gas community that has
viewed the new prices as a long-awaited break from hard times
brought on by deregulation amid excess supplies and shortages of
pipeline capacity in the 1980s. At Canada's top gas producer,
Alberta Energy Co., AEC Oil & Gas president Randy Eresman has
told stockholders that the promised land has been reached at last
and the industry has a right to stay. In this brighter world for
Canadian producers, there is no more "trapped gas" backed up behind
limited pipeline capacity.
With Alliance Pipeline being completed on top of expansions by
the Foothills and Northern Border systems, shipping capacity has
been raised to the point where it is being transformed into a
commodity - and one more likely to have its price discounted than
the gas moving in the lines. "That's a change Canadian producers
have been waiting over 30 years for," Eresman said. AEC had much to
do with the change, as a founding sponsor of the Alliance project,
which also contributed its first president, Dennis Cornelson.
Vollman's address amounted to a warning to the gas supply side
to think about the headaches proliferating on the buying end of the
industry. They start in the Alberta home-base of the Canadian
industry, where distributor Atco Gas has applied for a winter rate
increase of about 16% to pass through current market prices of
about C$6.50 per gigajoule (US$4.40 per MMBtu). The increase comes
on top of earlier hikes that, coupled with high oil prices, already
prompted Alberta's Conservative government to tap a treasury flush
with royalty revenues for a once-only citizens' energy rebate worth
C$300 (US$206) per taxpayer. Similar rate increases are being felt
across Canada, although only Alberta has the gas-royalty revenues
to offset them with a political plum.
Atco executive vice-president Jerome Engler said "the price we
are now paying for natural gas certainly reflects what is happening
to energy prices throughout North America. The proliferation of
pipeline capacity means Canadian consumers wind up paying as much
as American counterparts. Canadian deregulation policy pledges the
NEB not to interfere with exports unless domestic consumers can
prove they are unable to obtain supplies on terms competitive with
purchases by U.S. buyers."
Gordon Jaremko, Calgary